Presentation to the House of Commons Finance Committee

Presentation to the House of Commons Finance Committee

Mr. Chairman and Members of the House of Commons Finance Committee,

I am pleased to be here on behalf of the Atlantic Institute for Market Studies to offer our viewpoint to you.

There are, of course, many challenges facing the new government and, indeed, the government will want to act on them. We all understand that a government’s spending power is considerable but ultimately comes from its ability to tax and accumulate debt.

If the Atlantic Institute for Market Studies can leave members with one overriding objective it is not to become hooked on chronic deficit spending that will eventually return Canada to the days of a government that is overextended.

Going in debt is a lot like getting entangled in a foreign conflict – easy to get in to and very difficult to get out of.

We know this from Canada’s experience with deficit spending in the 1970s, 80s and 90s. And more recently, but less dramatically, in the last Parliament when the former government worked to balance the budget following heightened spending in the aftermath of the 2008 Great Recession.

It is worrisome to hear from the current government that promised annual deficits of no more than $10-billion could see the red ink more than double this coming fiscal year. This would make it nearly impossible to return to a balanced budget in the near term.

Once we start down this road we know how it ends – rising and wasteful spending on annual interest payments, higher taxes, and even eventual cuts to federal transfer payments.

So here are three suggestions to controlling costs while still hitting policy objectives –

The Finance Minister is under great pressure to get money out the door quickly. Give him some room to manoeuvre so that money isn’t poorly spent. The original Liberal promise was to spend more over a four-year mandate, not push it out quickly. Stick to that plan so tax dollars are wisely managed.

Second: Control the number of public sector workers as well as pay, benefit and pension costs. According to the Public Accounts, the cost per federal employee is $124,479 (2015). While there is debate over the size of the wage gap, there is near universal agreement that public sector workers enjoy more generous benefits than those in the private sector. There are two ways to control the overall budget envelop for the public sector. Either reduce the number of workers or lower the costs by using outside benchmarks when negotiating contracts.

This committee would be well advised to monitor the size and cost of the public sector for the bureaucracy has the ability to quietly, but quickly, expand when attention is focused elsewhere.

Indeed, our work at AIMS reveals that the size and cost of my region’s public sector is larger and costlier than those in other parts of Canada. It is one reason for our budgets deficits and why our taxes are at punitive levels.

Third: Incentives matter. As the old proverb goes, “Give a man a fish and you feed him for a day, but teach a man to fish and you feed him for a lifetime.”

Provinces are very much like the proverbial man. Simply providing additional federal transfers for social programs to low-growth provinces ultimately does a disservice to these regions. The fiscal gap these provinces experience is due, in part, to a dwindling workforce and a departure of young workers to other provinces. This results in these provinces having more seniors as a percentage of the overall population, which reduces the tax base and drives up per capita health costs.

Equalization is the complex tool to ensure the so-called have-not provinces have similar fiscal capacity. Meanwhile, federal transfers to all provinces and territories for health, education and social services should remain uniform – that is calculated on a per capita basis – across the country.

This is the way to incentivize provinces to adopt pro-growth policies that create jobs to keep and attract young workers. Offering additional transfer dollars due to long-standing “tough circumstances” will not change the dismal economic outlook for these jurisdictions.

If provincial governments are provided more transfers without a requirement to adopt growth policies and develop their resources, the economic outlook for Atlantic Canada will not improve. And after a few years, after more workers have departed and the situation has worsened, these governments will be back asking Ottawa for more.

A robust economy is the result of good public policy choices. When the productive sector of the economy is healthy it means governments have the resources to fund important social programs.

Finally, I would be remiss if did not make the case for the Energy East pipeline. The project will create good paying jobs across Canada and in the Maritimes. Along with other large infrastructure plans in the region – such as shipbuilding and the Lower Churchill hydroelectric project – Energy East is important for our growth prospects and long-term development.

John Williamson, Vice President of Research
Atlantic Institute for Market Studies

Note: In 2013 17.8 per cent of all jobs in Canada were in the civilian public sector. By comparison, in Atlantic Canada the figure is 22.6 per cent. That is five points above the national average. (AIMS: The Size and Cost of Atlantic Canada’s Public Sector, September 2014, page 5.)